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Friday, July 11, 2014

Philip Pilkington — The Great Unwinding: Some Thoughts on the Incoherence of Mainstream Economics

Today, I believe, mainstream economics is completely incoherent. What do I mean by that? Well, basically if you are in the mainstream you can pretty much believe in whatever you want these days.

Mainstream economics today can be made to say anything. But in being able to do this it says nothing. All the new gimmicks that have been introduced into the mainstream — from asymmetric information to rational expectations — have rendered it a total free-for-all. So, some of the mainstream will tell you that fiscal stimulus will have zero effect on the economy (Ricardian equivalence) while others will tell you that it is the key to future prosperity. Many will fall somewhere in the middle, unable to articulate their actual beliefs in any concrete manner.

In my experience the mainstream has become so incoherent that most of the time these economists will formulate their policy stance completely arbitrarily. Their opinions on the real economy are formed very much so the way the man in the street formulates his: either by assimilation of whatever is in vogue or by engaging in largely arbitrary construction (usually in line with the political predilections of the person in question).

How did this occur? I would argue that there were two key moments in the history of mainstream economics that led to this Great Unwinding.…

This is why I strongly support the pluralist movement among students. I believe that if all the options are put on the table the students will likely gravitate toward Post-Keynesian economics for the simple reason that it is the most comprehensive and coherent body of theory available. I am perfectly willing to let students make this decision on their own. It seems that it is the mainstream who insist that only their approach is taught. Their insistence on monopoly is, I believe, a sign of enormous insecurity.

3 comments:

As I mentioned elsewhere, the Piketty supporters should try to integrate their theories into a coherent body of economics. Everything is interconnected in economics, and no work can meaningfully stand alone. That would be like trying to promote a cure for cancer unconnected to the basic biological and anatomical systems...

The results of the Cambridge Capital Controversies led to a fracture within the more pragmatic side of the mainstream. The object of attack in the CCCs was the standard marginalist production function. The production function sought to show two things. These were as follows.

(1) That the distribution of income in a market economy would be dictated by relative productivities of labour and capital...

(2) That market economies are inherently self-stabilising in the long-run.

Another thing missing from books like Froyen’s is a good theory of growth...

In textbooks like Froyen’s the old Solow model is generally used. This is a truly awful, static model of growth that incorporates the worst excesses of marginalist abstraction from the real world...

Mitchell, however, introduces the student to the supposedly more outdated Harrod-Domar model...

The model shows how there is no “natural” overlap between the rate of productivity growth and the rate of income growth. It also allows Mitchell to raise important distributional issues — indeed, the chapter is entitled “Distribution and Growth”, echoing the likes of Joan Robinson. But more important to me is that the student will be able to recognise that the real world is messy. There is no tendency for everything to just “work out”...

Different levels of productivity growth definitely occur in really-existing capitalist economies and these definitely do not produce a sufficient level of aggregate demand to sustain full employment of capital and labour. As can clearly be seen today distribution can also affect this process — when profits are high and wages are low the economy can enter a period of protracted secular stagnation.